Tread carefully with SPACs: Cutting corners rarely pays off

Companies should take the IPO process seriously and use its checks and rigours to secure the long-term health of the business.

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A short while ago I read a very interesting piece in the Financial Times looking at a rise in special purpose acquisition companies, or SPACs– that will “buy tech companies and provide a back door to the stock market.” It got me thinking, is cutting corners to go public really what burgeoning businesses need to do to finance the next stage of their growth? For some it may work, but companies should take the IPO process seriously and use its checks and rigours to secure the long-term health of the business.

The sentiment was that this is what the market needs, that unicorns – companies that have achieved a valuation of $1bn or more through private funding rounds – want access to the public market without limiting the opportunity for private investors. SPACs enable entrepreneurs to take their companies public more quickly. They do this by aiming to reduce the IPO process from a year to 60-90 days. A SPAC is a company that has raised money publicly to acquire an as yet unspecified private company. So SPACs raise blind pool money, meaning there are fewer restrictions or regulations.

Some argue that a SPAC allows for greater investor input into the investments themselves. These investors do not choose the deals, but they instead choose to opt out of a specific opportunity and receive reimbursement of funds accordingly. In addition, an investor has the ability to vote on any opportunity presented as a target in the reverse merger transaction. In short, perhaps the greatest advantage from an investor’s perspective in a SPAC deal is the ability to have a say, whether a yay or nay essentially, in the investment decision – a feature that differs greatly from the so-called blind pools of the venture capital world. Ultimately, the perceived benefits are the lack of delay caused by decision making, the attraction to the swiftness that investors can make their decision and how promptly they can choose to be involved, or indeed pull out.

The need for speed has without question fed the world with innovation and is one of the reasons we are living in a period of technological revolution. Having worked on the investment side of the tech industry for over 20 years, I have been involved with many companies that have reached new heights quicker than one could have ever anticipated. I also been on the boards of a number of companies looking towards an IPO, such as ForeScout which went public on Nasdaq in October. Speed and breaking down traditional mechanisms are exactly what it takes to disrupt a market. Many entrepreneurs strive to be disruptive, and tech investors look for disruption in an opportunity.

However, is this yearn to disrupt, this hunger to do things more quickly, a good thing when looking at floating on a public market? My answer is no.

I mirror the sentiments of Lise Buyer, who, when asked about this new SPAC, said:

“I think they’re addressing the wrong issue. Going public isn’t hard. Audits are time consuming, but will be required regardless of the IPO mechanism. Meeting with investors is a rare opportunity to learn how outsiders with a broad market perspective size up the opportunity. It’s not clear why a healthy company would want to forgo that learning.”

The off-putting factor

The experience garnered from taking a company public holds businesses in good stead for the years to come. We have helped a number of businesses navigate the processes and markets to reach the IPO stage and so I speak from experience.

I believe in finding the key to the front door and walking straight in. Financially, access to the public market is obviously invaluable. The new finance can be re-invested in R&D, expanding into further international markets or other growth boosting initiatives. I appreciate that increased capital is something one can also garner from the ‘back door’ so-to-speak, but what you cannot replicate is the sheer exposure of a traditional listing. The public awareness achieved opens a business up to a whole new investor group and unlike some, I do not believe this puts others off.

In fact, one could argue that a SPAC itself could be the off-putting factor. My experience is that throughout the process of taking a company public, everyone involved is extremely sensitive – and quite rightly so. Sensitive to change, to doubt, to anything remotely opaque throughout the process. Given the amount of capital involved in any IPO, the numbers of people involved and the amount of possible pitfalls, precision is key. Whether the listing is in the United States, Europe or the Far East doesn’t matter. Nor does it matter should the company itself, its advisors or investment partners be based in any international market, the rules still remain the same. SPACs cast doubt and are synonymous with corner-cutting. It is an unnecessary risk to take when looking to build relationships, raise a profile and be as precise as possible.

Trying to avoid the trickier elements of a listing, such as the need for added disclosure, is quite simply fool’s gold. The structures in place force businesses to look inwards and ensure they are truly ready for the next stage in their development – a valuable lesson at any level. Of course, going public is not for everyone, and companies must evaluate all of the potential advantages and disadvantages. However, if a business and its backers do decide that an IPO is the best interests of the company, cutting corners is not the way to go. Be proud, walk through the front door and show the world you are a mature, healthy and growing company.